Anderson on Q3 2014 Results

Good afternoon, ladies and gentlemen. Welcome to the Six Flags’ Third Quarter 2014 Earnings Conference Call. My name is Wanda and I will be your operator for today’s call. During the presentation, all lines will be in a listen only mode. After the speakers’ remarks, we will conduct a question and answer session (Operator Instructions). Thank you.

I would now like to turn the call over to Nancy Krejsa, Senior Vice President, Investor Relations and Corporate Communications for Six Flags. Please go ahead.

Hello, and welcome to our earnings call this afternoon. With me are Jim Reid Anderson, Chairman, President and CEO of Six Flags; and John Duffey, our Chief Financial Officer.

Our call will begin with prepared comments from both Jim and John and then we will open the call for your questions. On the call our comments will include forward looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in such statements, and the Company undertakes no obligation to update or revise these statements.

In addition on the call, we will discuss non GAAP financial measures. Investors can find a detailed discussion of business risks and reconciliations of non GAAP financial measures to GAAP financial measures in the Company’s annual reports, quarterly reports or other forms filed or furnished with the SEC.

At this time, I’ll turn the call over to Jim for his prepared remarks.

Thank you, Nancy, and good afternoon everyone. Today I’m very excited to let you know that we have delivered yet another record financial performance. The Company is firing on all cylinders, both strategically and operationally, and we’re headed for a fifth record year in a row. As a result, the Board and management of Six Flags have considered the strong momentum and taken the decision to set a new long term financial goal for the organization, $600 million of modified EBITDA by 2017.

I’m really proud of our Six Flags team. Q3 was in fact the highest quarterly revenue and EBITDA ever reported by the Company. We also set another new industry record for profitability with a modified EBITDA margin of 40.7%. And in addition, our guest satisfaction scores continue to reach new highs. Our 7% revenue growth and 8% EBITDA growth were achieved by ongoing execution of our business strategy, which includes delighting our guests, innovating guest focused products and services, improving the efficiency of our operations, building a high performance team culture, and of course, building shareholder value year by year. Our revenue growth was primarily driven by consistent implementation of our pricing strategy, which has been and will continue to be, the largest contributor to our long term growth.

Let me briefly remind you that for many years, prior to the current strategy, Six Flags underpriced its unique offerings and resorted to heavy discounts to attract guests. For the past four years, we have steadily chipped away at these discounts, while simultaneously raising the quality of the park experience. The 2014 season has been no different. We continue to implement the two main elements of our pricing strategy. First, we implemented mid to high single digit price increases; second, we continue to fence in numerous discounts. For example, in several parks we shifted to more Bring A Friend for $9.99 on certain dates in lieu of traditional Bring A Friend free offers. These types of programs are effective in achieving our goal of maximizing revenue, profit and cash flow, and we continue to have a multiyear opportunity to raise prices, tweak our approach to discounting and grow attendance.

We have seen great success with our Membership in Season Pass programs as evidenced by the 10% growth in the active pass base over prior year. Our Membership program is in its infancy stage, given that we introduced it in 2013. We believe we have further opportunity for higher adoption rates which should help grow attendance over time and enhance our recurring revenue base. Inside the park among other items, our food and beverage offering, and in particular our all Season Dining Pass continue to be an excellent growth driver for us in terms of both revenue and profit.

The 2014 season was the second full year of all Season Dining Pass and we see great opportunity for further penetration of this offering for multiple years to come. It is a tremendous value for our guests and it’s an excellent tool to grow revenue and enhance profitability. We have also made excellent progress with our international partners in developing Six Flags branded theme parks in those markets and we continue discussions with potential partners in other countries. We firmly believe this will be a sustainable, valuable and significant long term growth opportunity for the Company.

Based on our continued success and the probable achievement of Project 500, we have established a new long term aspirational target of achieving 600 million of modified EBITDA by the year 2017. As a reference point, our September trailing 12 month modified EBITDA number was $467 million. We believe it is important for both investors and our employees to keep eyes set on long term stretch goals while delivering strong returns on an interim basis.

We work very hard to be prudent stewards of our shareholders money. We intend to continue investing 9% of revenue into capital project, then return excess cash flow to shareholders in the form of dividends and share repurchases. We are extremely proud to be able to increase our quarterly dividend by 11% to $0.52 per share beginning with the fourth quarter 2014 dividend, our fifth consecutive year of dividend increases. At about 6% yield today, our stock has one of the most attractive yields in the market. Put into perspective, this is nearly triple that of the S 500 and we are committed to a stable and growing dividend year after year.

Our cash earnings per share on a trailing 12 months basis was $2.51, up 14% over the last 12 months. It has grown at 14% annual rate over the last three years, twice the growth rate of the S 500. In addition, our new project 600 target implies cash EPS of nearly $3.75, a 13% annual growth rate through 2017. At this time, I’m going to ask John to share a few more details on our third quarter financials. John?

Thank you, Jim and good afternoon to everyone on the call. I am extremely pleased with our continued success in generating revenue, profit and cash flow gains year over year. I’ll start with the third quarter performance followed by year to date results and finish with the review of cash flow and capital structure. So let’s dissect the numbers a bit. Total revenue in the quarter increased $37 million or 7.4% as a result of an 8% increase in admissions revenue, a 4% increase in in park revenue, a 3% increase in sponsorship and accommodations revenue and $5 million of international revenue.

Admission revenue per capita increased 8%
facebook besthairbuy to $25.87 as a result of our solid pricing gains partially offset by a stronger mix of Season Pass dependants. In park revenue per capital increased $0.61 in the quarter to $17.92 as our focus on new product offerings as well as the continued penetration of our all season dining passes continues to deliver volume increases. Attendance increased nicely by 50,000 to 11.8 million guests.

Adjusted EBITDA for the quarter grew $23 million or 8.4% to 291 million as a result of the strong revenue growth. So let’s move on to discuss the year to date and LTM performance. Year to date revenue is up $36 million or 3.8% driven by increases in guest spending per capita and $10 million of international revenue. We continue to be very pleased with the increase in guest per capita spending which grew 8% or $3.23 to $43.77 with strong increases in both admissions and in park spending.

We talked before about our strong focus on leveraging our cost structure, year to date cash operating expenses increased a modest 2.5%. The combination of strong revenue gains and cross leverage improved year to date adjusted EBITDA to $393 million, an increase of 25 million or 6.7%. LTM adjusted EBITDA now stands at $429 million with a modified EBITDA margin at a company and industry record of 40.7%, up 82 basis points from a year ago.

In the first nine months of the year we generated 234 million of operating cash flow after capital investments. We repurchased a $119 million or 3.1 million shares of our stock, paid $136 million in dividends and paid down $5 million of debt related to required amortization. Net debt as of September 30, was $1.232 million representing a 2.9 times net leverage ratio. The strong 2014 Season Pass sales, plus a strong unit sales of 2015 Season Pass has generated this fall, along with the continued growth in memberships, has increased our active pass base as of September 30, 2014 by 10% versus the same date last year.

Over the course of a season, Season Pass holders and members spend more of their parks than a single day visitor and so they are most valuable customers. Members behave very similarly to Season Pass holders in terms of visitation frequency and in park spending and the program provides the added benefit of higher retention and therefore higher stability in our revenue stream. With our LTM modified EBITDA now at $467 million, we have determined that the likelihood of achieving Project 500 by 2015 is probable. As such, we are required to begin and expensing the stock based compensation expense associated with that plan and accordingly recorded a $73 million non cash charge in the quarter. We will continue to accrue charges in future quarters although at a lower level than the third quarter charge until Project 500 is achieved.

Before I turn the call over to Jim, I’d like to briefly comment on our capital structure and capital allocation. The Company is in a great position. Our net leverage of 2.9 times adjusted EBITDA is about half since relisting and we have a relatively low cost of debt at 4.6%, of which 73% is at a fixed rate and 97% of our debt is not due until the end of 2018 or later. Our recurring revenue base, high cost management and disciplined approach to capital spending provides a consistent and growing cash flow stream. The strong cash generation, combined with our low financial leverage, makes me very comfortable with our decision to increase the dividend 11% to $0.52 a share per quarter beginning in Q4 2014, leaving ample room for future annual increases.

So, now I’d like to turn the call back over to Jim.

Thanks so much John. I am very proud of our record setting performance in the third quarter. As I take a step back, it is clear to me that our ability to consistently deliver record setting performance is really due to three factors; first and foremost, our employees. I said it before and I’ll say it again. Our employees truly represent our greatest asset. Through their relentless focus and execution they have transformed Six Flags into the most profitable and most consistently performing regional theme park company in the world. Second, our parks, we truly have the best theme parks located in some of the most populated and prosperous markets in North America.

As evidence of this, a recent survey by USA Today readers named Six Flags Magic Mountain in LA as the number one theme park in America, Six Flags Great Adventure in New Jersey came in a close second. The final reason, why we are able to perform so consistently is that we are exclusively focused on regional theme parks, which in my opinion is the most attractive subsector of the theme park industry. With only a few months left in our 2014 season, we are now intense on delivering our last few weekends of Thrills by Day and Fright by Night as part of our highly successful and growing Halloween event, Fright Fest. We had invested incrementally into this superb franchise over the last four years and it is paying back its big dividends with lots of room for additional long term growth.

Beginning in late November and through the balance of the 2014 season, we will turn our focus to holiday in the park where we decorate our parks with millions of lights and celebrate the cheer of the winter holidays. This year, we will introduce Holiday in the Park in two parks for the first time ever, Magic Mountain in LA and Six Flags Over Georgia in Atlanta, bringing the total to six parks. And we are confident our guests in those markets will truly enjoy celebrating their holidays at our parks and create the beginnings of a new family tradition. In most of our parks, we’ve already begun preparations for the 2015 season. Our Season Pass sales are off to a great start and much of the planning and construction for the new capsule is well underway. In typical Six Flags’ fashion, several of these will be world record breaking rides.

In closing, I am confident that we are very well positioned for the future. I am extremely proud of our Six Flags team and all they do to consistently deliver record breaking results. And we are solidly on track to deliver our fifth record year in a row. Indeed, our future at Six Flags is very bright. Wanda, at this point could you please open the call for any questions.

Good afternoon, and congratulations on the quarter. Jim, I guess, as we think about Project 600, can you just talk about how much of that is organic? And just, I assume it’s going to remain on a certain steady state portfolio. And also, how are you thinking about the incorporation of the international asset light opportunities into that metric?

Joel, it’s great question. And as you know, we don’t ever break out any future related projections. But what I would say is this; first and foremost, I consider it all to be organic. There is no M in other words we’re not going out to buy anything. But it will be driven by our own North American business and by this relatively new international licensing business that we have developed, so those will be the two major drivers and obviously within those there are subsets of each and I think I mentioned in the comments earlier that the single greatest driver we believe will be pricing.

I think that’s a fair question and I think that I want to outline, I think John has said it before and I would reinforce it for the group. Our goal is to drive revenue, profitability and growth in cash flow. That’s the number one priority. We like to get attendance but everything we do will be driven to try to get our profitability and cash flow up. Now, we do think we are going to get attendance growth, as we mentioned our active pass base is up about 10% at the end of the quarter and we’ve seen very nice Season Pass growth. So we think that in 2015 we should see nice attendance gains but we will not commit to that. In our goal it’ll always be to optimize for profitability in cash flow.